Europe enters a pivotal year

Region served a cocktail of political risk

by John Nugée in London

Wed 11 Jan 2017

Janus, the Roman god of transitions and doorways who stood at the turning of the year, was traditionally depicted with two faces, one looking to the past and one to the future. At this time of year there is a small industry in the media of people echoing Janus, as commentators reflect on the past 12 months and make their predictions for the next.

For some it is also a time to recall past predictions. Forecasters may choose to either parade their foresightedness or explain away misses. The exercise is often more one of selective memory than anything else.

Every now and then the media must confess to a more than usually widespread failure. 2016 was one such occasion. Regardless of how many of last year’s predictions came true or not, they all read now like the glowing preview of the maiden voyage of the Titanic, whose main point was that ‘the catering will be superb’. It was, but the article missed a ‘minor detail’: half way across the Atlantic, the ship hit an iceberg and sank.

In similar vein, the missing minor detail in most commentators’ 2016 predictions was the eruption of political populism. Of the two political events for which the past year will be known in the history books – the UK-EU referendum and Donald Trump’s election as US president – the first was thought by most forecasters to be very unlikely and the second was hardly considered at all. Not a single respected mainstream commentator predicted both correctly. Few writers have made the same mistake of overlooking populism this year.

The political scene in Europe is especially volatile. The continent is entering a 12-month period which will see national elections in the Netherlands, France, Germany, probably Italy, possibly Greece and maybe even the UK, plus Britain invoking Article 50 of the Lisbon treaty to initiate Brexit negotiations.

All of this is in addition to the still unsolved challenges of the euro area and the Italian banking system, pressures from mass migrations, and terrorism. Not to mention the wider backdrop of Trump’s inauguration, Russian adventurism and Turkish President Recep Erdogan’s growing authoritarianism. This is a cocktail of considerable political uncertainty.

But behind January’s ‘please read me’ headlines it is important not to lose sight of three things. First, some polls matter more than others. The elections in France and Germany will stand far above those in other countries in importance for the European Union.

Second, the chance of a populist upset in both of those countries, while not zero, is not high. France’s two-round electoral system allows the establishment and electorate to rally around the non-populist candidate in the second round. Although Marine le Pen’s right-wing National Front is regularly making it to the second round, it has yet to triumph overall in any important election. And Germany’s tradition of coalition governments looks strong enough to keep the controversial Alternative for Germany out of any position of power.

Third, it is unlikely that governing parties in Europe will be caught quite so much by surprise as former UK Prime Minister David Cameron was by the lack of respect for both the truth and those in positions of authority, or as the Democrats were by Russian interference in the US presidential race. The German authorities have already tightened their cybersecurity infrastructure amid warnings of Russian attempts to influence their poll.

There are therefore good grounds for believing that, despite the challenges, the EU’s political centre will hold. But the risks are there, and no politician facing elections in this pivotal year will feel entirely safe or be able to ignore them. Everything will depend on whether the tide of populism that triumphed in the UK and US in 2016 continues to rise.

John Nugée is a Director of OMFIF and a former Chief Manager of Reserves at the Bank of England.